The Multinational Subsidiary

One of the most stimulating and productive areas of research in international business over the years has been that concerning the multinational (MNE) subsidiary. In the recent past much of this research effort has been directed at the theme of managing the MNE subsidiary, exploring the entrepreneurial potential of and ways of unleashing innovation in foreign subsidiaries. However, the economic development dimension of foreign direct investment (FDI) and MNE subsidiaries’ operations has also been a significant research area for academics, especially those in regional economics and economic geography (recognising that more research is required – see Paterson and Brock, 2002). Host country governments have drawn on this research to devise policies to attract, sustain and develop inward investment activities.

The costs and benefits of increased direct foreign investment for recipient developed and less developed countries have been discussed widely in the literature in recent years. The impact of inward foreign investment has also been the subject of government investigations in a number of countries, reflecting fears of the potential loss of sovereignty implicit in a branch-factory type economy, and aimed at devising legislation to maximise the net benefits derived from the presence of international corporations.¹ While some such studies have referred to the implications of inward investment for regions within host countries, many important regional growth and regional policy aspects have been explored only superficially. The present paper, based on an empirical study of US investment in Scotland, attempts to make a small contribution in this latter context by examining certain characteristics of the functional development of US branch plants. Since plant functions give at least some indication of the authority and decision-making potential delegated to local management, the results to be presented have implications for any assessment of the gains and losses of increasing external control in Scotland, and through this for UK regional policy.

Relatively little is known about the research and development activity of US or other foreign-owned companies in the UK. This is in part due to the disclosure difficulties surrounding research effort, but is also a function of serious definitional problems as to what constitutes R&D, especially where cross-company and cross-industry comparisons are concerned. These are discussed here and some now conventional solutions are adopted. The main purpose of this paper is, however, to summarise a number of interesting and potentially important propositions which have emerged over recent years on the nature of R&D activities in US multinational enterprises (MNEs) and thereafter to apply them to an empirical study recently conducted among a sample of US-owned electronics affiliates in Scotland. It might be expected that this sample will prove to be a rather special case within the spectrum of US MNEs, given the R&D orientation. On the other hand, there is a particular Scottish interest in the sector given that it accounts for some 25 per cent of employment in US-owned affiliates, and is also the most expansive sector in recent years, especially when set against a backcloth of substantial decline in many MNE affiliates in Scotland (Hood and Young, 1982). Arguably, too little attention has been given to the nature of activity within electronics affiliates in Scotland until a recent SDA sector study (Scottish Development Agency, 1979).

Japanese foreign direct investment (FDI) in Europe has attracted much attention from competitors, consumers, academics and governments, especially over the past decade. This attention has been particularly focused on manufacturing investment, not only because of its relationship to competition and trade policy, but also due to the intense efforts which have been directed towards the attraction of that investment to relatively disadvantaged regions within the EC with a view to employment creation and industrial regeneration. Moreover, the distribution of this investment has been concentrated in a limited number of countries, the UK and Germany playing dominant roles in terms of project numbers and investment, with the UK being substantially ahead as regards employment. For a variety of reasons related to both competitive and anticompetitive issues and economic nationalism, almost every one of the major investment decisions has been the subject of some controversy.

Although still relatively small, Japanese manufacturing investment in the EC has been growing very rapidly [since the mid-1980s]. It has been largely import-substituting investment, oriented towards Europe as a whole rather than to any particular national market. For both these sets of reasons it has been geared towards gaining the benefits of, and avoiding the potential barriers associated with, European economic integration. In terms of geographical location, the UK has historically dominated as a preferred entry point for Japanese foreign direct investment (FDI) in manufacturing, with Germany a close second. The background to this has been extensively examined in the literature (Dunning, 1986; Oliver and Wilkinson, 1988; Hood and Truijens, 1993).

This contribution explores some aspects of the strategic integration of inward investing companies within the EC as these organisations have adjusted to the competitive environment of the last decade and as they have progressively come to terms with an integrated market. Attention is drawn to some of the propositions which have emerged about the processes of adjustment which might be expected to occur within multinational firm networks and to the limited empirical evidence which exists to allow these to be tested. Subsequent concentration is on the analysis of a set of UK data based on an empirical study of MNE affiliates from the USA and Continental Europe which was undertaken by the authors on behalf of the Department of Trade and Industry (Hood and Young, 1983). In the final section some conclusions are drawn and policy implications suggested

Reflecting the changing nature of industries and competition worldwide, there has been an explosion of writings on the themes of global strategies and the globalisation of business, including authors such as; Doz and Prahalad (1987); Porter (1987); Hood and Vahlne (1988). A multinational company (MNE) pursuing a global strategy conceives its manufacturing, marketing, technology and other policies on a worldwide basis, and co-ordinates its resources worldwide in pursuit of global objectives, such as worldwide market share.¹ It is not yet clear how many companies and industries can be categorised as global; but the view is that there is a strong trend towards globalization with developments in the world economy, including the emergence of new industries like informatics and biotechnology, the revolution in information and communication systems, the need to amortise investment in world-scale plants and R&D programmes, and a growing standardisation of tastes (Leontiades, 1986).

The objective of this paper is to provide an overview and synthesis of the different strands of literature relating to multinational enterprises (MNEs) and regional economic development, with especial reference to foreign MNEs in the European Community (EC). The international business subject area is of interest to researchers from several disciplines, whose contributions have developed partly in isolation and certainly with different foci of attention. By integrating them with the regional development interest at the forefront of attention, it is hoped to provide new insights for academics and policy makers. The timing is appropriate since early evidence and forecasts point to a difficult environment for the attraction of new greenfield manufacturing foreign direct investment (FDI) through the 1990s. This is a consequence of the growth of FDI in services and the changed modality of new investment activity, away from greenfield projects towards joint ventures, acquisitions and alliances involving different components of the value chain (United Nations, 1992).

It is well established that the roles of foreign-owned subsidiary companies (i.e. the activities that they have responsibility for in the multinational corporation) vary according to such contingencies as the local environment (Ghoshal and Nohria, 1989), the structural context imposed by the parent (Gupta and Govindarajan, 1991), and the entrepreneurial capacity of subsidiary management (Birkinshaw, 1997), to name some of the most well-known factors. In this paper we examine another potentially important predictor of varying subsidiary roles – the membership (or not) of a leading-edge industry cluster. An industry cluster can be defined broadly as an aggregation of competing and complementary firms that are located in relatively close geographical proximity. In this paper we focus on those ‘leading-edge’ clusters identified by Porter (1990, 1998) and operationalised in terms of high export intensity.

There has been a profound evolution in thinking about multinational corporations (MNCs) [since the late 1980s]. Traditionally, in academic models researchers assumed that ownership-specific advantages were developed at the corporate headquarters and leveraged overseas through the transfer of technology to a network of foreign subsidiaries (Vernon, 1966; Dunning, 1981). As these overseas subsidiaries grew in size and developed their own unique resources, however, it became apparent to many researchers that corporate headquarters was no longer the sole source of competitive advantage for the MNC. Scholars developed models such as the heterarchy (Hedlund, 1986) and the transnational (Bartlett and Ghoshal, 1989) to reflect the critical role played by many subsidiaries in their corporations’ competitiveness, and research attention began to shift toward understanding the new roles played by subsidiaries.

A central theme of much of the recent literature on the strategy of the multinational corporation (MNC) is the increasingly important role played by subsidiary companies as contributors to the development of firm-specific advantages. Traditional academic models that viewed subsidiaries as either ‘market access’ providers or as recipients of the parent company’s technology transfers (Vernon, 1966) gave way in the 1980s to richer conceptualizations in which subsidiaries tapped into leading-edge ideas, undertook important research and development work, and became active participants in the formulation and implementation of strategy (Bartlett and Ghoshal, 1986; Hedlund, 1986; Gupta and Govindarajan, 1994). The generation of firm-specific advantages, correspondingly, shifted from being the sole concern of the parent company to a collective responsibility for the corporate network.

The Challenge of Going Global is not simply to sell products wherever customers are but to take advantage of bright ideas wherever they spring up. Indeed, growth-triggering innovation often emerges in foreign subsidiaries – from employees closest to customers and least attached to the procedures and politesse of the home office. NCR’s automatic teller business, for instance, took off only when the development team shifted activities from corporate headquarters in Dayton, Ohio, to Dundee, Scotland. Under the guidance of a charismatic leader with scrappy persistence, NCR’s Scottish operation became the largest manufacturer of ATMs in the world and brought the moribund Dundee manufacturing centre back from the brink of extinction.

The purpose of this chapter is to consider some of the future directions for research in international business, and in particular in the areas of foreign subsidiary management and economic development. These are both important themes in Neil Hood’s work and in my own research. Moreover, they both continue to be important and relatively fertile grounds for new empirical and theoretical studies

My colleagues have invited me to write this chapter in the interests of completeness. I agreed to do so, on the premise that the collection of academic papers contained within the rest of the book necessarily gives a partial glimpse of my writings; and only part of the total career story. Since I cannot deny the truth of this, this chapter is included. But first the context needs to be sketched out. I have always been interested in applying economics and business knowledge – both in the business and public spheres. The pursuit of that policy and implementation interest has been evident in three different but related dimensions, each of which is briefly commented on within this chapter.